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Preparing for Weakness in the U.S Economy

Economics / US Economy May 16, 2007 - 09:27 AM GMT

By: Money_and_Markets


I'm something of the resident bull here at Weiss Research. While Martin and Mike often take a more pessimistic view of economic events, I generally look on the sunny side. The vigorous discussions we have are great reality checks for the whole team.

As much as I hate to admit it, some of the things Martin and Mike have been talking about, as well as other recent developments, do look downright bearish to me.

The good news is that there are still reasons to be bullish, and plenty of great places to invest. I'll get to that in a moment.

Let's start by talking about some of the bearish forces at work here in the U.S. …

First, the economy is misfiring. First-quarter gross domestic product came in at an anemic 1.3%. That's not the kind of economic activity that will keep jobs and incomes growing.

The really bad news is that the first-quarter GDP rate is probably going to be revised even lower . In fact, slumping retail sales and other factors could hammer first-quarter economic growth down to something like 0.7%!

Second, jobs are harder to get and paying less. Over the past three months, payrolls have been expanding at a monthly rate of 118,000, compared to 195,000 in the prior three months. That's a deceleration of 77,000 jobs per month.

What's the cause? Home builders, realtors and contractors, which used to be the growth sectors of the economy, are hemorrhaging jobs. And factory employment continues to slide. If this trend continues, job seekers will soon outnumber job openings. It's hard for the consumer to keep up a happy face if that happens!

In addition, average hourly earnings growth is also slowing. In April, hourly earnings grew at a 0.2% pace — the slowest increase since last May.

Third, retail sales are cratering. Less jobs at less pay weighs on retail sales like an 800-pound albatross. Nationally, retail sales slid 1.8% in March. Wal-Mart and Target took the biggest hits. But sales also fell at Federated (down 2.2%), The Gap (16%), Kohl's (10.5%), JC Penney (4.7%), and other big retailers.

Fourth, consumers are borrowing more. Consumer credit jumped $13.5 billion in March, versus expectations for a $4 billion gain. This works out to a 6.7% increase at a seasonally adjusted annual rate. And February's number was revised up to $5.6 billion from $3 billion. Why would consumer borrowing be increasing when retail sales are going down? Probably because hard-stretched consumers are paying their bills with credit cards.

There's really only one way for that to end — badly. Especially since the credit card industry got Washington to pass draconian bankruptcy laws. Thanks to those new laws, many consumers won't be able to get out from under debts if they go bankrupt.

Fifth, the housing sector continues its swan dive. Mike Larson has been telling you all about this. Home sales are running at their lowest level in four years. And median home prices are expected to decline 1% nationally this year, the first time that's happened since the National Association of Realtors started keeping track nearly 40 years ago.

Now the good news …

The Rest of the World Might Just Save our Bacon

India's economic growth has averaged 8.6% in each of the past four years, and it seems to be accelerating. Meanwhile, China's economy is growing at a red-hot 11.1% clip. This growth is powering a massive rise in consumer consumption in these countries.

And I'm not just talking about cars, though it's true that in both countries, the populace is making the transition from bicycles to scooters to cars. I'm talking about air conditioners … appliances … medicine … clothing … consumer electronics. Here's an interesting factoid: By 2020, one out of every three people using cell phones will be from India or China.

It's not just India and China, either. There are a bunch of fast-growing economies in the emerging markets. Overall, the global economy is doing quite well — it's expected to expand 4.2% this year, leaving poor ol' Uncle Sam in the dust.

How can that help the U.S.? Well, companies in the S&P 500 get 49% of their sales from overseas, up from 30% in 2001. This year, that number may cross the 50% mark as global growth runs rings around the U.S. Now, more than ever before, the world economies are linked together in a symbiotic relationship. That means fast-growing countries like China and India just might be able to save our bacon!

It also means that if you're holding the right stocks, you may be cushioned from a U.S. slowdown. For example, in my Red-Hot Asian Tigers and Red-Hot Canadian Small-Caps services, I focus on stocks that will feed the raw material hunger of the world's growing economies. It's a strategy that has worked very well.

And there are other ways investors can protect themselves from a slowdown, or even an outright recession, in the U.S. …

Three of My Favorite Investments Are Great Hedges Against Economic Weakness

1. Uranium — I don't call it the recession-proof metal for nothing. Uranium demand is "non-elastic" — that is, utilities have to feed their nuclear-powered reactors whether times are good or bad.

I've told you about the python-tight supply/demand squeeze in uranium, a squeeze that should last for at least the next 10 years. In my book, that's why uranium investments could help insulate your portfolio from bad times and ride the wave of the good times.

2. Gold — The yellow metal has its own supply/demand squeeze. Demand from consumers and investors is rising, and yet global supply is falling. Around the world last year, global mine production fell by more than 3% to 2,471 metric tonnes.

Plus, gold is great protection against a falling U.S. dollar. It's often said that a currency is a vote of confidence in the economy it represents. And if the U.S. economy is slowing, you can expect foreign investors to put their money to work elsewhere.

Sure enough, both the euro and gold have moved higher relative to the dollar this year. To see what I'm talking about, look at this chart …

You can see that the recent rally in the dollar hasn't done much to change the trend, either. Indeed, it's just giving you a chance to get into gold investments while the getting is still good.

3. Foreign ETFs — Foreign ETFs give you a double-dose of protection against a slowing U.S. economy.

First, foreign markets are simply trouncing the U.S. market. Take a look at my table and see for yourself!

What that means is that even if things stay the same, foreign ETFs are a great place to be. And if America's economy is slowing down, they should outperform the U.S. market even more.

In addition, a U.S. investor can make money even if these ETFs turn in a flat performance.

How so? Remember, these ETFs are baskets of foreign stocks that are priced in foreign currencies. But you're buying them with U.S. dollars. So if the U.S. dollar falls while you're holding these ETFs, your initial investment will be worth more when you sell it and receive the proceeds in dollars. It can also work the other way, of course. But as I just showed you, the dollar looks likely to keep falling.

Here's the bottom line: I don't know if the U.S. is headed for a recession. But it makes sense to prepare your portfolio just in case. That's why I like uranium, precious metals, foreign stocks, and U.S. stocks that feed the foreign hunger for raw materials.

Yours for trading profits,

Sean Brodrick writes:

By Sean Brodrick

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